March Trade Gap - Better Headline Number, But Mixed Below The Surface

The investment community received another important report on the U.S. economy this morning when the Department of Commerce released trade gap figures for the month of March at 8:30 A.M. (EDT). The report showed that the U.S. trade deficit narrowed by 11% in March, to $38.8 billion. The consensus expectation was calling for a trade deficit of $42.1 billion.

The primary impetus behind the narrowing of the trade gap was a decrease in imports. In March, the number of goods entering the country fell to $223.1 billion, from a revised $229.6 billion in February. At the same time, exports decreased 0.9%, to $184.3 billion. The number of imports declined by the most since February, 2009, as the U.S. shortfall with China fell to a three-year low. In particular, purchases of foreign-produced capital equipment and consumer goods decreased. Demand for imports has waned as domestic businesses stockpile fewer goods and households (more below) cut back on purchases.

After a closer examination, the latest trade figures, despite the overall decrease in the trade deficit, are a bit troublesome, in our opinion. The Commerce Department report showed that exports of most U.S.-made goods—including foods, feeds, and beverages (down $1.1 billion), automotive vehicles, industrial supplies and materials, capital goods, and consumer goods (each of the four categories was down about $300 million)—fell in March. The reduction in exports could be viewed as a troubling sign for the U.S. economy, in that it highlights that the global market—which is seeing moderating growth in China and a host of nations in recessions in the euro zone—is not taking in as many American-produced goods as it did earlier in the year. Meantime, the sharp decrease in imports of goods and services into the U.S. may well be a sign that the American consumer, now faced with higher payroll taxes and spending cuts, is becoming more hesitant with regards to their spending budgets.

All in all, the latest international trade gap report should be considered mixed, at best. While it was nice to see the narrowing in the overall deficit, the pullback in overseas demand is disconcerting, especially when considering that conditions in many overseas markets appear are showing minimal signs of improvement in recent months. In particular, Europe, which accounts for roughly 20% of this country’s exports, is struggling from an economic standpoint, exacerbated by the fact that several key euro-zone members, including Greece, Italy, Spain, and Portugal, are facing strict austerity measures in light of their ongoing sovereign-debt problems. Thus, boosting shipments of American-made goods, which helps this nation’s economic output, may prove more difficult, as companies are faced with slowing economies overseas.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.